Teacher Contributes Less for His $130K Pension Than You Do for Your $21K Social Security

Let’s ask public employees to pay their fair share.

According to the latest SBA (Small Business Administration) statistics there are over 1.1 million small businesses in Illinois. Their size ranges from one employee to 500 employees and in most cases, with very few exceptions, the owner pays 12.4% of his wages into the pension plan called Social Security.

On the other hand the 300,000 public employees in the state pension system pay an average of 8.4% into their far superior plans and for many fewer years – from 25 years for State Troopers to 34 for K-12 teachers. That compares to many Social Security recipients who have paid in for 40, 50 or even more years.

The result of this distorted, politically directed contribution scheme is multi-million dollar pensions for public employees paid for largely by private sector workers whose main pension plan, Social Security, is severely limited in scope and payout.

How does Social Security compare to state pensions?

The examples of public pension excess are almost too numerous to mention. In 2009 we have 13 state troopers retiring at age 50 with pensions in excess of $100,000. Six-figure pensions for middle-aged teachers and universities employees proliferate like flies on rotten meat. There is no upper limit for state pensions. We already have a $460,000 pension, can a $1 million pension be far behind?

Social Security, on the other hand, has limits. This year it is about $21,000 maximum at age 62.

Social Security recipients, on average, pay into the system longer and in the case of the self-employed and small businessmen pay a higher percentage of their income, 12.4%, than do, for example, teachers who pay 9.4%. Thus the total dollar contribution for Social Security contributors ends up much higher than those receiving the 6-figure state pensions. And the state pensions tend to start at an earlier age, 50 in case of troopers and as early as 54.5 in the case of teachers.

You don’t have to be a math whiz to see that the state pensions, with lower payments in, higher payments out and years earlier retirement are unsustainable as currently legislated. After all, as we constantly hear in the media, Social Security is in big financial trouble. If $21,000 Social Security payouts at age 62 are financially unsustainable, what do you think $100,000 pensions at age 50 are going to do to future Illinois taxpayers?

Here’s an example of the problem.

This chart shows the pension contributions in and pension payments out for two professional music teachers each making the same salary during their careers. The first is a music teacher working 9 months a year for 34 years and the second is a self-employed music teacher working 12 months a year for 40 years. As you can see the self-employed person pays much more in than the teacher but ends up getting only 1/7th as much out.

In the yellow box we see the contributions as they currently exist. The self-employed worker contributes 58% more than the teacher even though the teacher receives seven times as much in pension payments $5.8 million vs. $800,000.

The green box represents what a teacher should pay to make his contributions equal to a private sector person making the same wage.

The purple box shows the exaggerated 7X pension due the teacher even though with the new “Proposed Contribution Rate” of 14.4% he has paid no more into his pension than has the Social Security contributor.

What the next governor should do.

Require public employees to increase their contributions to at least match the level of a private sector self-employed person making the same salary.

In addition he should begin the process of increasing the retirement age back to 60 and the paid-out rate to 60% of salary, the retirement age and payout rate in effect when the constitutional guarantee was approved in 1970.

Up next: Pension Mythology – When The Going Gets Tough, Just Make Stuff Up

Bill Zettler is a free-lance writer and consultant specializing in public sector compensation. He can be contacted at this email address.